Volatility Makes a Surprise Appearance

I wouldn’t say volatility is back but it made an appearance this week. The Volatility Index ($VIX) was up 56% this week and the iPath S&P 500 VIX Short-Term Futures ETN (VXX) was up 19%, its biggest percentage move since August last year.

The volatility spike in the VXX this time was preceded by two weeks of stronger than average upside volume. This suggests that it may be more than a one off event. There may actually be some “fear” associated with the movement in the Fear Index and its proxy.

The VXX weekly chart shows the stochastic oscillator rising out of a deeply oversold condition and the on balance volume indicator confirming the positive direction of this week’s money flow.

If the market is preparing for a more meaningful pullback, money managers will be quick to protect their January gains. This means buying puts and while the VXX is a second and less efficient derivative of Volatility Index ($VIX) it should continue higher along with the underlying index.